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Five top towns for real estate investors in 2023

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Western Investor‘s picks for the top towns in Western Canada for real estate investors in 2023

No. 1, Calgary: With 2,600 new high-paying jobs pledged in September alone, real estate prices a fraction of Vancouver, no rent controls and oil prices flirting with US$100, Alberta’s biggest city is ripe for real estate investors right now.

In late September, De Havilland Aircraft of Canada said it plans to build a manufacturing and maintenance facility on a 3,700-acre site it bought in Wheatland County, just east of Calgary, that will employ 1,500 people.

That brilliant news was followed just days later by the announcement that India-based global tech giant Infosys is bringing 1,000 jobs to downtown Calgary.

Infosys, a leader in next-generation digital systems, has doubled its original hiring commitment from when the company first expanded into Canada in 2021.

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“Today is the beginning of our next chapter in Canada,” said Ravi Kumar, president, Infosys. “Calgary’s IT innovation potential is unlimited, and we are delighted to be a part of its future.”

Infosys officially opened its new Digital Centre in Calgary Centre on September 26 and will take an estimated 200,000 square feet of office space, analysts say.

Calgary is the top Canadian city for real estate investors now and into 2023. The price of oil hit US$130 per barrel this spring and though it has retreated to the US$89 range as of October, it is twice as high as its bottom in 2014 and will continue to transform the Alberta economy next year.

Calgary real GDP is forecast to expand by 6.3 per cent in 2022 and grow by 3.8 per cent in 2023, according to the Conference Board of Canada, far ahead of Canada’s projected 1.2 per cent growth.

The commercial real estate market is led by the industrial sector, with a tight vacancy rate of 2.2 per cent and average lease rates of $11.65 per square foot, about half the price of Vancouver, which is attracting B.C. players to Calgary.

Investors are also piling into Calgary’s retail sector, drawn by consistent consumer spending of $8 billion per month; and to the multiple-family residential market, where prices are a fraction of Vancouver or Toronto.

With strong job creation, lower provincial taxes, high immigration and a business-friendly environment, Calgary is the place to be in 2023.

No. 2, East Vancouver. The Broadway Subway and Millennium SkyTrain line extensions; the new $2 billion St. Paul’s Hospital; detached houses less costly than in the suburbs and half that of Vancouver’s West Side; and a government pledge for higher density. If a real estate investor can’t make money here next year they should get into another business.

A detached house price in East Vancouver is now $1.5 million, which is lower than in Burnaby, Richmond or the North Shore suburbs and half the price of the neighbouring West Side of Vancouver. It also represents perhaps the top residential real estate play in Canada.

East Vancouver includes the 450-acre False Creek Flats, where 17-acre St. Paul’s Hospital campus is now under construction, along with other job-generating commercial buildings. But the Flats is not zoned for housing: that will be served by surrounding East Vancouver.  At the same time, the $3 billion extension of the SkyTrain system, which pivots from East Vancouver, has convinced the city to massively boost density around planned stations. Rents in Vancouver are the highest in Canada and East Vancouver will be the most in-demand rental market in the country next year.

As for other commercial sectors, before a new 102,000-square-foot strata office building was about to launch marketing last month in the Flats, a U.S. medical firm bought the entire building. Industrial land in East Vancouver is selling for $13 million an acre; multi-family land at $19 million per acre; and retail sites at more than $1,000 per square foot. Get in now and these prices will seem a bargain in a year or two.

No. 3, Bamfield: The first highway into this tiny Pacific Rim town is now open and completes early in 2023. Land and home prices have shot in the past year in a hamlet with raw freehold land and massive sandy beaches that is being called “the next Tofino.”

What if you could have bought in Whistler or Tofino 30 ago? That is the type of opportunity we see for recreational property in Bamfield on the West Coast of Vancouver Island.

This year a 76-kilometre “sealed” and partly paved highway replaced a rough logging road linking Bamfield with Port Alberni and the rest of Vancouver Island. The highway will officially open in 2023, but pioneers have already bid prices higher.

“There were major increases in housing prices of about 50 per cent to 75 per cent once the road announcement was made in 2020,” Craig Filipchuk of Remax Mid Island Realty told the local Ha-Shilth-Sa newspaper.

The average cost of a home in Bamfield was $261,391 a decade ago. In 2022, the average home price is $644,300. REW.CA had four Bamfield listings in mid-October, priced from $549,000 up to a five-bedroom waterfront house at $1.3 million, which is less than the price of a bungalow in Vancouver and perhaps a third of the cost of Tofino waterfront.

Bamfield is a quaint place reminiscent of an Atlantic fishing village, but we believe it is about to experience the West Coast real estate experience.

No. 4, Penticton and the South Okanagan:   Penticton is challenging Kelowna as the hot spot in the Okanagan. Facing two lakes, it is the centre of the South Okanagan which will lead B.C.’s recreational market in 2023, drawing investors from the Lower Mainland and Alberta.

Best investment: waterfront. This year 23 waterfront homes have sold in the South Okanagan, with average prices down 47 per cent from a year earlier to $1.57 million as of September 2022. This compares with an average waterfront home price of $4.5 million in the Central Okanagan, which is further away from the Lower Mainland. Detached house prices in the South Okanagan, which includes the popular lakefront town of Osoyoos, are now $779,500, the lowest price in the entire Okanagan. Penticton also has a near-zero rental vacancy rate and REW.CA had a dozen condos in the town listed at $275,000 or less in mid-October.

Buy the dip. Penticton is the best recreational and resort residential market in B.C.’s Interior for 2023.

No. 5, Nanaimo: Multi-family​ land is now selling for $3 million an acre; there is huge expansion at Nanaimo’s container port; major employers are recession-resistant hospital, medical services and universities – and there is a large influx of people from across Canada.

Nanaimo has a population north of 100,000 and, according to the 2021 census, is among the fastest-growing cities in Canada, tied for third place with Kamloops, B.C.

Of the record $319 million in building permit values through the first six months of 2022, residential projects account for $238 million.

A recent project includes a hotel and about 700 homes planned for the northern edge of downtown Nanaimo on a seven-acre site near the Millstone River.

The buy here is rental properties, residential – price of both are well below that of Victoria – plus industrial land and industrial strata.

A $100 million-dollar expansion of Nanaimo’s container port led by DP World, a Dubai-based global leader in ­shipping and port logistics, will be a game-changer for the local economy. It is estimated the site’s 30 acres will create about 1,000 new jobs.

The Port Authority has industrial land for lease for industrial, but surrounding land is already in the hands of two major landholders: Harmac Pacific, which owns more than 1,250 acres at Duke Point that it purchased in 2008; and Seacliff Properties which bought 726 acres four years ago and is planning a massive mixed-use development.

Colliers International in Nanaimo estimates that serviced industrial land at Duke Point could eventually be valued at a $1 million per acre, up from around $400,000 per acre today.

Newcomers and a tight commercial real estate market are forcing prices higher, but we feel Vancouver Island’s Harbour City is just beginning its real estate ascension.

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An ETF to Consider While Investors Pick Up Distressed China Real Estate

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Investors are giving the China real estate market a second look as the country continues to work through the real estate doldrums brought on by last year’s Evergrande Crisis. As such, this opens up opportunities for exchange traded funds (ETFs) that get exposure to Chinese real estate.

It’s often said in the investment world to follow the “smart money.” That could mean tailing the bets of institutional money managers such as Brookfield Asset Management, which is looking at opportunities in distressed Chinese real estate.

Per a South China Morning Post article, “Brookfield Asset Management is on the lookout to acquire premium commercial property from distressed Chinese developers, aiming to increase its footprint in the world’s second-largest economy where fresh capital is needed to bail out the troubled real estate sector.” Based on the report, the Canadian firm is targeting properties in specific cities with the probability of generating returns in the long run.

“We are seeing opportunities and are pursuing lucrative deals,” said Yang Yiwen, senior vice-president of real estate portfolio management for Brookfield in China. “There will be drawn-out negotiations because of pricing gaps to close.”

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As mentioned, the value stems from last year’s Evergrande Crisis, which saw a number of large real estate developers come close to defaulting on their loans. This prompted them to sell real estate such as commercial buildings at low prices in China’s prime locales, giving real estate investors plenty of opportunities to snatch up property at a bargain.

An ETF to Play the Real Estate Bounce

ETF investors looking to play a rebound in China’s real estate market can obtain exposure using the Global X MSCI China Real Estate ETF (CHIR). CHIR seeks to provide investment results that generally correspond to the price and yield performance, before fees and expenses, of the MSCI China Real Estate 10/50 Index.

The underlying index tracks the performance of companies in the MSCI China Index (the “parent index”) classified in the real estate sector, as defined by the index provider. Summarily, ETF investors get the following:

  • Targeted exposure: CHIR is a targeted play on the real estate sector in China — the world’s second-largest economy by GDP.
  • ETF efficiency: In a single trade, CHIR delivers access to dozens of real estate companies within the MSCI China Index, providing investors with an efficient vehicle to express a sector view on China.
  • All share exposure: The index incorporates all eligible securities as per MSCI’s Global Investable Market Index Methodology, including China A, B, and H shares, red chips, P chips, and foreign listings, among others.

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A look back, and ahead, at Canada’s commercial real estate landscape

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MSCI head of real estate economics Jim Costello and LaSalle Investment Management global strategist Jacques Gordon, speaking at the Global Property Market conference in Toronto.. (Steve McLean RENX)
MSCI head of real estate economics Jim Costello (right) and LaSalle Investment Management global strategist Jacques Gordon, speaking at the Global Property Market conference in Toronto.. (Steve McLean RENX)

This year’s Global Property Market conference opened with presentations which looked both forward and back . . .  reviewing the major trends of 2022 and offering an investment outlook for 2023.

Following are snapshots of what MSCI head of real estate economics Jim Costello and LaSalle Investment Management global strategist Jacques Gordon had to say during their talks at the Nov. 29 event at the Metro Toronto Convention Centre.

MSCI is a New York City-headquartered provider of decision support tools and services for the global investment community and Costello has 30 years of experience analyzing the relationships between real estate and economics.

LaSalle is a global real estate money manager with more than $81 billion in assets under management.

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Gordon has been responsible for the macro strategy and micro research used to guide all investment decisions in 30 countries, but will soon take a new role as executive in residence at the Massachusetts Institute of Technology Center for Real Estate.

Jim Costello, MSCI

Costello said the real estate industry has enjoyed a period of tremendous returns globally and in Canada, but that dropped significantly in Q3 and major challenges remain ahead.

The global volume of real estate deals valued at more than $10 million is down from last year, when there was an enormous flow of capital into the sector. It is still, however, at an elevated level compared to historic deal flows.

“It was just a lot of folks hungry for yield in a period when interest rates were exceptionally low,” Costello said. “But as rates reset, there are going to be challenges for some of those investments.”

Many of the deals being done were larger as smaller assets that were traditionally purchased by investors with limited pools of capital behind them stopped moving earlier.

Liquidity fell in 97 of 155 global markets in the third quarter and Costello doesn’t see it picking up again for a while.

New York City was the most liquid market in the world from 2017 to 2020, but the Australian city of Sydney now holds that title.

Larger gaps have been created between buyer and seller price expectations. Costello said price corrections are needed to drive U.S office liquidity.

He believes sellers need to cut their price expectations by 15 per cent to get deals done and that number could increase.

Deal activity was down in Q3 in every asset class and the most popular markets have also changed.

Instead of traditional front-runners New York City and London, Los Angeles and Dallas have become the top global markets owing to their large number of logistics facilities and apartment buildings — two asset classes investors continue to chase.

Alternative real estate sectors — including self-storage, data centres, medical office, research and development, manufactured housing, student housing and seniors housing — have been gaining ground on more traditional asset classes.

Jacques Gordon, LaSalle Investment Management

Gordon said there were four inflection points affecting global economies and real estate in the transition from 2022 to 2023 and beyond. Things are moving:

•    from interest rates being lower for longer to higher rates with a heavier drag on cash flows;
•    from a COVID rebound to a global stall;
•    from upward price pressure to downward price pressure; and
•    from fossil fuel-driven economies to renewable energy-driven economies.

“Most of us are in private equity real estate,” Gordon said in talking about interest rates. “Whether we’re debt or equity players, we’re putting money to work for multiple years at a time.

“When you do that, you realize that we’re going to have to endure this period of, probably, 12 to 18 months of higher inflation and higher interest rates, but this too shall pass.”

Gordon said the COVID-19 pandemic “blasted a hole in the global economy” in 2020, but last year there was a “supercharged rebound with governments just blasting out surplus money.”

However, gross domestic product (GDP) numbers in countries around the world have been well below expectations in 2022.

Oxford Economics’ GDP forecasts for next year aren’t good, with several countries (including Canada) expected to have negative growth.

Real estate experienced major upward price pressure through 2021 and the first part of 2022, but now investors are having to deal with downward price pressure and declining transaction volumes in the sector.

Gordon said the depth of buyer pools has retreated across property types and, although deals can still get done, there are fewer bids for properties and sellers often don’t want to accept them.

Office vacancy rates are on the rise. JLL figures show a global vacancy rate of 14.5 per cent, with Europe at 7.2 per cent, Asia Pacific at 14.1 per cent and the U.S. at 19.1 per cent in the third quarter.

Coal, oil and gas comprise 77 per cent of the global primary energy mix, but Gordon said the future of energy looks nothing like its past.

He believes it’s going to take a lot of hard work to reduce the reliance on fossil fuels and shift toward more environmentally friendly energy.

“We in this room can commit to a net-zero-carbon world, but we need the rest of the world to come with us,” Gordon said. “Otherwise, we won’t get there.”

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Cities Face Long-Term Neglect, Not Just A Real Estate “Doom Loop” – Forbes

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There’s been a sudden spike in worrying about city problems created by declining commercial real estate (CRE) values, especially urban office buildings where increased working from home (WFH) has reduced in-office work. But instead of a CRE “apocalypse” or “urban doom loop” that some are predicting, we may just see increased economic and budget pressures, the latest chapter in America’s long-term neglect of its cities

Although the “doom loop” argument highlights real challenges, it’s a mistake to suggest American cities were in great shape prior to the Covid-19 pandemic. This framing appears in a widely-discussed recent essay in the New York Times by Thomas Edsall, “How a ‘Golden Era for Large Cities’ Might Be Turning Into an ‘Urban Doom Loop’.”

As my new book Unequal Cities (from Columbia University Press) points out, American cities have suffered persistent inequality for decades. It’s true that pre-pandemic, American cities were doing better in many ways—lower crime, growing populations, and appreciation from some scholars and policy makers that cities are important drivers of the nation’s economic innovation, prosperity, and growth. But it wasn’t a “golden era.”

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Edsall relies on an excellent recent paper from Columbia University professor Stin Van Nieuwerburgh, which views significantly increased WFH as permanent, with “broader implications for investors in equity and debt markets, productivity and innovation, local public finances, and the climate.” He contrasts a troubled urban future with recent decades, “which were in many ways…a golden era for large cities.”

The urban “doom loop” would start with increased WFH reducing urban jobs and commercial real estate values, leading to lower tax revenues and reduced city services (including police, transit, and sanitation), leading to more WFH, etc. Edsall seems to endorse the view “that the shift to working from home, spurred by the Covid pandemic, will bring the three-decade renaissance of major cities to a halt, setting off an era of urban decay.”

Van Nieuwerburgh also has a first-rate recent paper with New York University’s Arjit Gupta on falling CRE values in New York, where they introduced the concept of an “office real estate apocalypse.” As I discussed here in September, their strong empirical work is sobering, but also looks like a worst case scenario that doesn’t envision much potential mitigation from alternative uses of excess office space.

There’s no question WFH has slowed office use, especially in some central business districts, and that slowdown in turn is hurting commercial real estate values and city budgets. Of course, the Federal Reserve’s continuing interest rate hikes and apparent pursuit of a recession to fight inflation aren’t helping either.

But there are two problems with the “doom loop” discussion. First, real estate markets always fluctuate. Edsall’s essay quotes Harvard economist Ed Glaeser on potentially dire urban scenarios from CRE problems. But Glaeser also notes “conventional economic theory suggests that real estate markets will adjust to any reduction in demand by reducing price” and that’s not always a bad thing. If financial markets have over-valued CRE assets, then there will be a correction, but not necessarily an “apocalypse.”

Underused office buildings, including older and less competitive ones, still have value. I’ve written about how they can be converted into residential real estate or other uses. Edsall does quote the great urbanist Richard Florida, who notes that “downtowns and the cities they anchor are the most adaptive and resilient of human creations; they have survived far worse.”

University of Southern California economist Matthew Kahn (whose work should have been referenced in Edsall’s essay) sees expanded WFH as a force that can revive cities, especially older second-tier ones. This could lead to a more balanced national economy with wider opportunity not concentrated in a few superstar cities.

And contrasting a mythic urban “golden age” against the pending “doom loop” is dramatic, but misleading. America’s metropolitan form and politics are consistently biased against cities, and urban inequality has been persistently high for decades.

Cities anchor regional economic prosperity but are surrounded by literally hundreds of politically independent suburbs which reap many economic benefits without fully sharing costs. Cities bear a disproportionate share of those costs—education, poverty, crime, aging infrastructure, a constrained tax and revenue base—reproducing inequality and racial discrimination. Federal and state policies and aid also disfavor cities, making it very hard for them to fight inequality on their own.

Of course, a commercial real estate meltdown will make cities’ problems even harder to solve. A CRE meltdown and attendant city budget and social pressures would be another episode in how badly we treat cities and their residents. But America always has disliked and disfavored its cities, and we shouldn’t view current urban problems through distorting rose-colored glasses that see a lost “golden age” for American cities.

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